On April 1, 2020, Benintendi enters into a 5-year, non-cancelable lease with Fenway Inc for use of
Question:
On April 1, 2020, Benintendi enters into a 5-year, non-cancelable lease with Fenway Inc for use of a hitting machine requiring payments of $20,000 every March 31 (1st payment is due today). Fenway requires that the asset at the end of 5 years is returned with a guaranteed residual value of no less than $9,006.
The asset has a fair value of $100,000 and an 8-year useful life. Benintendi’s incremental borrowing cost is 6.5% but Fenway seeks a 4% return from this lease.
The lease has no renewal options and the asset will revert back to Fenway at the end of the 5 years.
PV of an annuity due at 4% for 5 years = 4.629895 and PV of a lump sum at 4% for 5 years is .821927
Required:
- Determine if this lease is a financing or operating lease.
- Calculate the present value of the lease agreement.
- Make the original entry on both sets of books on April 1, 2020.
- Create the amortization table for year one only.
- Make the required March 31, 2021 journal entries for both sets of books.
Financial Accounting
ISBN: 978-1259914898
5th edition
Authors: David Spiceland, Wayne M. Thomas, Don Herrmann